The impact of a unionised labour market in a Schumpeterian growth model

This paper extends the seminal creative destruction growth model of Aghion and Howitt [Econometrica 60 (1992) 332] to investigate the relationship between unemployment and growth. We distinguish low-skilled and high-skilled labour and assume that a union bargains over the low-skilled labour wage. This causes unemployment, but the growth effect is ambiguous. On one hand, the higher wage will squeeze expected profits of innovators, which is bad for growth. On the other hand, the union affects the marginal product of high-skilled labour and, hence, the high-skilled wage in the manufacturing sector declines. This causes a migration of high-skilled labour from the manufacturing into the research sector. This effect is growth enhancing. We show that the overall effect depends crucially on the elasticity of substitution between high-skilled and low-skilled labour. With,an elasticity less than 1, the good growth effect dominates the bad, and vice versa. In the Cobb Douglas case, the two effects cancel out. (C) 2002 Elsevier Science B.V. All rights reserved.